Correlation Between Municipal Bond and Selected American

Can any of the company-specific risk be diversified away by investing in both Municipal Bond and Selected American at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Municipal Bond and Selected American into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Municipal Bond Fund and Selected American Shares, you can compare the effects of market volatilities on Municipal Bond and Selected American and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Municipal Bond with a short position of Selected American. Check out your portfolio center. Please also check ongoing floating volatility patterns of Municipal Bond and Selected American.

Diversification Opportunities for Municipal Bond and Selected American

0.68

Correlation Coefficient

Municipal Bond  Selected American

Poor diversification

The 3 months correlation between Municipal and Selected is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Municipal Bond Fund and Selected American Shares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Selected American Shares and Municipal Bond is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Municipal Bond Fund are associated (or correlated) with Selected American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Selected American Shares has no effect on the direction of Municipal Bond i.e., Municipal Bond and Selected American go up and down completely randomly.

Pair Corralation between Municipal Bond and Selected American

Assuming the 90 days horizon Municipal Bond is expected to generate 1.41 times less return on investment than Selected American. But when comparing it to its historical volatility, Municipal Bond Fund is 4.23 times less risky than Selected American. It trades about 0.44 of its potential returns per unit of risk. Selected American Shares is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  3,809  in Selected American Shares on July 30, 2025 and sell it today you would earn a total of  288.00  from holding Selected American Shares or generate 7.56% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Municipal Bond Fund  vs.  Selected American Shares

Municipal Bond

Risk-Adjusted Performance

High

Compared to the overall equity markets, risk-adjusted returns on investments in Municipal Bond Fund are ranked lower than 34 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Municipal Bond is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Selected American Shares

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Selected American Shares are ranked lower than 11 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Selected American may actually be approaching a critical reversion point that can send shares even higher in November 2025.

Pair Trading with Municipal Bond and Selected American

The main advantage of trading using opposite Municipal Bond and Selected American positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Municipal Bond position performs unexpectedly, Selected American can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Selected American will offset losses from the drop in Selected American's long position.

The idea behind Municipal Bond Fund and Selected American Shares pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.